1

Dean CLVs Notes on Agency August 2010

1 NATURE AND OBJECTIVE, AND KINDS OF THE CONTRACTS OF AGENCY page 2

2 FORMAL REQUIREMENTS FOR CONTRACT OF AGENCY page 68

3 AUTHORITY & POWER, DUTIES & OBLIGATIONS OF THE AGENT page 134

4 OBLIGATIONS OF THE PRINCIPAL page 190

5 EXTINGUISHMENT OF AGENCY page 210

2

1 NATURE AND OBJECTIVE, AND KINDS OF THE CONTRACTS OF AGENCY

[Updated: 24 August 2010]

I NATURE & OBJECTIVE, AND KINDS OF CONTRACTS OF

AGENCY

1. Definition and Objectives of Agency

Art. 1317. No one may contract in the name of

another without being authorized by the latter, or unless he

has by law a right to represent him.

Art. 1403. The following contracts are unenforceable,

unless they are ratified:

(1) Those entered into in the name of another person

by one who has been given no authority or legal

representation, or who has acted beyond his powers;

x x x.

Art. 1868. By the contract of agency a person binds

himself to render some service or to do something in

representation or on behalf of another, with the consent or

authority of the latter. (1709a)

o

The general rule embodied in Article 1317 of the Civil Code of the Philippines is that No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him; and that the consequence of one entering into a contract in behalf of another person without the latters

3

consent or authority, is to render the contract unenforceable, as mandated under Article 1403(1) of the Code.

In Philpotts v. Philippine Manufacturing Co., 40 Phil. 471 (1919), the Supreme Court expressed the counter-part principle that, as a general rule, what a person may do personally, he may do through another. Consequently, Article 1868 of the Civil Code defines the contract of agency as one whereby a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter. The statutory definition of the contract of agency is given from the viewpoint of the agent who binds himself to enter into juridical acts in the name of the principal, and thereby emphasizes the characteristic of the contract that is unilateral.

The legal framework which necessitates the need on certain occasions for the formal establishment of the agency relationship has been aptly discussed by the Supreme Court in Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978), where it held:

1. It is a basic axiom in civil law embodied in our Civil Code that no one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him. A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contracting party . . .

Out of the above given principles, sprung the creation and acceptance of the relationship of agency whereby one party, called the principal (mandante), authorizes another, call the agent (mandatario), to act for and in his behalf in transactions with third persons. . . . (at pp. 258-259;emphasis supplied.)

When an agency relationship is established, and the agent acts in the name of the principal, the agent is, insofar as the world is concerned, essentially the principal acting in the particular contract or transaction on hand. Consequently, the acts of the agent on

4

behalf of the principal within the scope of the authority have the same legal effects and consequences as though the principal had been the one so acting in the given situation. This principle is referred to as the doctrine of representation.

In Orient Air Service & Hotel Representatives v. Court of Appeals, 197 SCRA 645 (1991), the Court held that the purpose of every contract of agency is the ability, by legal fiction, to extend the personality of the principal through the facility of the agent; but that the same can only be effected with the consent of the principal.

In Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006), the Court held that It bears stressing that in an agent-principal relationship, the personality of the principal is extended through the facility of the agent. In so doing, the agent, by legal fiction, becomes the principal, authorized to perform all acts which the latter would have him do. Such a relationship can only be effected with the consent of the principal, which must not, in any way, be compelled by law or by any court. (at p. 223.)

In Doles v. Angeles , 492 SCRA 607 (2006), in response to the legal argument that there could not have been an agency relationship because the principal never confirmed personally to the third parties the establishment of the agency, the Court held

The CA is incorrect when it considered the fact that the supposed friends of [petitioners], the actual borrowers, did not present themselves to [respondent] as evidence that negates the agency relationshipit is sufficient that petitioner disclosed to respondent that the former was acting in behalf of her principals, her friends whom she referred to respondent. For an agency to arise, it is not necessary that the principal personally encounter the third person with whom the agent interacts. The law in fact contemplates, and to a great degree, impersonal dealings where the principal need not personally know or meet the third person with whom her agent transacts; precisely, the purpose of agency is to extend the personality of the principal through the facility of the agent. (at p. 622.)

5

In Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007), the Court held that The underlying principle of the contract of agency is to accomplish results by using the services of others to do a great variety of things like selling, buying, manufacturing, and transporting. Its purpose is to extend the personality of the principal or the party for whom another acts and from whom he or she derives the authority to act. (at p. 592.)

Lately, Philex Mining Corp. v. Commissioner of Internal Revenue, 551 SCRA 428 (2008), reiterated the principle that the essence of an agency, even one that is coupled with interest, is the agents ability to represent his principal and bring about business relations between the latter and third persons.

2. Parties to a Contract of Agency

The parties to a contract of agency are:

the Principal the person represented (mandante)

the Agent the person who acts for and in representation of another (mandatario)

The other terms used for the position of agent are attorney-in-fact, proxy, delegate, or representative.

Although Article 1868 of the Civil Code defines agency in terms of being a contract, it should also be considered as creating between the principal and an agent an on-going legal relationship which imposes personal obligations on both parties. This is in consonance with the personal nature of every contract of agency. Thus, Rallos held that out of the principle that no one may contract in the name of another without being authorized by the latter, sprung the creation and acceptance of the relationship of agency whereby one party, called the principal (mandante ), authorizes another, called the agent (mandatario), to act for and in his behalf in transactions with third persons. (at p. 259.)

6

3. Elements of the Contract of Agency

Like any other contract, agency is constituted of the essential elements of (a) consent; (b) object or subject matter; and (c) cause orconsideration.

In Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978), the Court held that the following are the essential elements of the contract of agency:

(a) Consent, express or implied, of the parties to establish the relationship;

(b) Object, which is the execution of a juridical act in relation to third parties;

(c) Agent acts as a representative and not for himself; and

(d) Agent acts within the scope of his authority.

(Reiterated Yu Eng Cho v. Pan American World Airways, Inc., 328 SCRA 717 [2000]; Manila Memorial Park Cemetery, Inc. v. Linsangan, 443 SCRA 377 [2004]; Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 [2007].)

The element not included in the Rallos enumeration is the cause orconsideration of every contract of agency.

The last two elements included in the Rallos enumeration should not be understood to be essential elements for the perfection and validity of the contract of agency, for indeed they are matters that do not go into perfection, but rather into the performance stage of the agency relationship. The non-existence of the two purported essential elements (i.e., that the agent acted for herself and/or the agent acted beyond the scope of her authority), does not affect the validity of the existing agency relationship, but rather the enforceability of the contracts entered into by the agent on behalf of the principal.

7

Thus, under Article 1883 of the Civil Code, If an agent acts in his own name, the principal has no right of actions against the person with whom the agent has contracted; neither have such persons against the principal. Under Article 1898 of the Civil Code, If the agent contracts in the name of the principal, exceeding the scope of his authority, and the principal does not ratify the contract, it shall be void as to the principal.

The last two elements added by Rallos, which are based on specific provisions of law, are meant to emphasize that the relationship of agency is set-up essentially to comply with the basic axiom in civil law embodied in our Civil Code that no one may contract in the name of another without being authorized by the latter, . . . A contract entered into in the name of another by one who has no authority or legal representation . . . shall be unenforceable, unless it is ratified, expressly or implied, by the person on whose behalf it has been executed. (at p. 258.)

a. The Element of CONSENT

The essential element of consent is manifest from the principle embodied in Article 1317 of the Civil Code that No person may be represented by another without his will; and that no person can be compelled against his will to represent another.

In Bordador v. Luz, 283 SCRA 374 (1997), in determining whether the purported principal (Brigida) can be held liable solidarily with her alleged agent (Deganos) for failure of the latter to return jewelries received allegedly on behalf of the purported principal (Brigida), the Supreme Court held that The basis for agency is representation. Here, there is no showing that Brigida consented to the acts of Deganos or authorized him to act on her behalf, much less with respect to the particular transactions involved. (at p. 382.) In addition, the Court held:

Besides, it was grossly and inexcusably negligent of petitioners to entrust to Deganos, not once or twice but on at least six occasions

8

as evidenced by six receipts, several pieces of jewelry of substantial value without requiring a written authorization from his alleged principal [Brigida]. A person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent. (at p. 382.)

In Dizon v. Court of Appeals, 302 SCRA 288 (1999), the Court held that just because several persons are constituted as co-owners of the same property does not make them agents to one another. In effect, the Court held that a co-owner does not become an agent of the other co-owners, and that any exercise of an option to buy a piece of land transacted with one co-owner does not bind the other co-owners of the land.

In Victorias Milling Co., Inc. v. Court of Appeals, 333 SCRA 663 (2000), the Court held:

It is clear from Article 1868 that the basis of agency is representation. On the part of the principal, there must be an actual intention to appoint or an intention naturally inferable from his owrds or actions; and on the part of the agent, there must be an intention to accept the appointment and act on it, and in the absence of such intent, there is generally no agency. (at p. 675.)

In Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006), the Court held that consent (i.e., the meeting of minds) of both the principal and the agent is necessary to create an agency: The principal must intend that the agent shall act for him; the agent must intend to accept the authority and act on it, and the intention of the parties must find expression either in words or conduct between them.

In the same manner, Dominion Insurance Corp. v. Court of Appeals, 376 SCRA 239 (2002), held that since the basis for agency is representation, then there must be, on the part of the principal, an actual intention to appoint or an intention naturally inferable from his words or actions; on the part of the agent, there must be an intention to accept the appointment and act on it; and in the absence of such intent, there is generally no agency.

9

Perhaps the only exception to this rule is the principle of agency by estoppel; but even then it is by the separate acts of the purported principal and purported agent, by which they are brought into the relationship insofar as third parties acting in good faith are concerned. More discussions on the essential element of consent shall take place in the section on essentialcharacteristic of consensuality of contracts of agency.

(1) Capacity of the Parties

For the validity of a contract of agency, it is required that the principal must have capacity to contract (Arts. 1327 and 1329), and principal may either be a natural or juridical person (Art. 1919[4]).

There is legal literature that holds that since the agent assumes no personal liability, the agent does not have to possess full capacity to act insofar as third persons are concerned. (De Leon and De Leon, Comment and Cases on Partnership Agency and Trusts, 2005 ed., at p. 356; hereinafter referred to as De Leons.)

Since a contract of agency is first and foremost a contract in itself, the parties (both principal and agent) must have legal capacities to validly enter into an agency. However, if one of the parties has no legal capacity to contract, then the contract of agency is not void, but merely voidable by reason of vitiation in consent, which means that it is valid until annulled.

Thus, a voidable contract of agency will produce legal consequences, when it is pursued to enter into juridical relations with third parties. If the principal is the one who has no legal capacity to contract, and his agent enters into a contractual relationship in the principals name with a third party, the resulting contract is voidable and subject to annulment. On the other hand, if the principal has legal capacity, and it is the agent that has no legal capacity to contract, the underlying agency relationship is voidable; and when the incapacitated agent enters into a contract with a third party, the resulting contract would be valid, not voidable, for the agents incapacity is irrelevant, the contract having been entered into, for and in behalf of the principal, who has full legal capacity.

10

The foregoing discussions support the fact that as a general proposition the lack of legal capacity of the agent does not affect the constitution of the agency relationship. And yet, it is clear under Article 1919(3) of the Civil Code that if during the term of the agency, the principal or agent is placed under civil interdiction, or becomes insane or insolvent, the agency is ipso jure extinguished. It is therefore only logical to conclude that if the loss of legal capacity of the agent extinguishes the agency, then necessarily any of those cause that have the effect of removing legal capacity on either or both the principal and agent at the time of perfection would not bring about a contract of agency.

Obviously, there seems to be an incongruity when it comes to principles involving the legal capacities of the parties to a contract of agency. The reason for that is that the principles actually occupy two different legal levels. When it comes to creating and extinguishing the contractual relationship of principal and agent, the provisions of law take into consideration purely intramural matters pertaining to the parties thereto under the principle of relativity. Since agency is essentially a personal relationship based on the purpose of representation, then when either the principal or agent dies or becomes legally incapacitated, then the agency relation should ipso jure cease.

But a contract of agency is merely a preparatory contract, where the main purpose is to effect, through the agent, contracts and other juridical relationships of the principal with third parties. The public policy is that third parties who act in good faith with an agent have a right to expect that their contracts would be valid and binding on the principal. Therefore, even when by legal cause an agency relationship has terminated, say with the insanity of the principal, if the agent and a third party enter into contract unaware of the situation, then the various provisions on the Law on Agency would affirm the validity of the contract. More on this point will be covered under the section on the essential characteristics of agency, as well as on the final chapter on extinguishment of agency.

11

b. The Element of OBJECT or SUBJECT MATTER

The object of every contract of agency is service, which particularly is the legal undertaking of the agent to enter into juridical acts with third persons on behalf of the principal. Therefore, the obligation created by the perfection of the contract of agency is essentially an unilateral personal obligation to do. More specifically, Rallos ruled that the object of every contract of agency is the execution of a juridical act in relation to a third person. (at p. 259.)

Items (b), (c) and (d) in the enumerated elements of Rallos can actually be summarized into the object or objective of every contract of agency to be that of service, i.e., the undertaking (obligation) of the agent to enter into a juridical act with third parties on behalf of the principal and within the scope of his authority.

c. The Element of CONSIDERATION or COMMISSION

Art. 1875. Agency is presumed to be for a

compensation, unless there is proof to the contrary. (n)

The cause or consideration in agency is the compensation or commission that the principal agreed or committed to be paid to the agent for the latters services. Under Article 1875 of the Civil Code, every agency is presumed to be for compensation, unless there is proof to the contrary. In other words, it is clear that there can be a valid agency contract which is supported by consideration of liberality on the part of the agent; that although agency contracts are primarily onerous, they may also be constituted as gratuitous contracts.

The value that Article 1875 of the Civil Code brings into the Law on Agency is that the presumption is that every agency contract entered into is for valuable considerationthat the agency serves for the benefit of the principal expecting to be compensated for his

12

efforts. It is the party who avers that the agency was gratuitousthat the agent agreed to serve gratuitouslywho has the burden of proving such arrangement.

The old decision in Aguna v. Larena, 57 Phil 630 (1932), did not reflect the principle that generally agency is for compensation, which is now embodied in Article 1875 of the Civil Code. In Aguna, although the agent had rendered service to the principal covering collection of rentals from the various tenants of the principal, and in spite of the agreement that principal would pay for the agents service, nevertheless, the principal allowed the agent to occupy one of his parcels of land and to build his house thereon. The Court held that the service rendered by the agent was deemed to be gratuitous, apart from the occupation of some of the house of the deceased by the plaintiff and his family, for if it were true that the agent and the deceased principal had an understanding to the effect that the agent was to receive compensation aside from the use and occupation of the houses of the deceased, it cannot be explained how the agent could have rendered services as he did for eight years without receiving and claiming any compensation from the deceased. (at p. 632.)

If Aguna were decided under the New Civil Code, then under Article 1875, which mandates that every contract of agency is deemed to be for compensation, the result would have been quite the opposite.

Recently, in De Castro v. Court of Appeals, 384 SCRA 607 (2002), the Supreme Court upheld the obligatory force of a compensation clause agreed upon in a contract of agency, thus

A contract of agency which is not contrary to law, public order, public policy, morals or good custom is a valid contract, and constitutes the law between the parties. The contract of agency entered into by Constate with Artigo is the law between them and both are bound to comply with its terms and conditions in good faith.

The mere fact that other agents intervened in the consummation of the sale and were paid their respective commissions could not

13

vary the terms of the contract of agency with granting Artigo a 5 percent commission based on the selling price. (at pp. 616-617.)

The foregoing discussions emphasize that as a commercial contract, agency exhibits one of the three characteristics common to all commercial contracts, which is that of being customary. Ordinarily in Civil Law, the question of compensation must be an integral part of the meeting of the minds of the parties to a contract of service; and that parties to a civil contract cannot be held liable for compensation to which they never expressly or impliedly agreed to.

In the realm of commercial contracts, customary rule or practice imputes that parties enter into commercial transactions or relationship for profit or for remuneration. Thus, in agency, the fact that such relationship has been established puts into application customary law that says that it is presumed that both parties knew that the services of the agent were for compensation. It is no even critical that the amount and nature of the compensation has not been previously agreed upon (as would have been critical for obligatory force to come into play for civil or private contracts of service), since the courts are empowered to apply customars to determine what compensation the agent is entitled tothat which the market customarily pays for the services rendered by the agent.

(1) Entitlement of Agent to Commission Anchored on the

Rendering of Service

The compensation that the principal agrees to pay to the agent is part of the terms of the contract of agency upon which their minds have met.Therefore, the extent and manner by which the agent would be entitled to receive compensation or commission is based on the terms of the contract.

Sometimes, the terms of the contract of agency on the agents entitlement to compensation are not clear, and decisions have had to deal with the issue of when an agent has merited the right to receive the compensation either stipulated or implied from the terms of the contract. The doctrine that may be derived from the

14

various decisions on the matter are anchored on the nature of the contract of agency as a species of contracts of services in general.

When the rendering of service alone, and not the results, is the primordial basis for which the compensation is given, then the proof that services have been rendered should entitle the agent to the compensation agreed upon.

On the other hand, if the nature of the service to be compensated is understood to be based on the results to be achieved, e.g, that a particular contract with a third party is entered into in behalf of the principal, then mere rendering of service without achievement of the results agreed upon would not entitle the agent to the compensation agreed upon.

In Inland Realty v. Court of Appeals, 273 SCRA 70 (1997), although the ultimate buyer was introduced formally by the broker to the principal, nonetheless the Court held that

. . . Petitioners did not succeed in outrightly selling said shares under the predetermined terms and conditions set out by Araneta, Inc., e.g., that the price per share is P1,500.00. they admit that they could not dissuade Standford from haggling for the price of P1,000.00 per share with the balance of 50% of the total purchase price payable in five years at 12% per annum. . . the lapse of the period of more than one (1) year and five (5) months between the expiration of petitioners authority to sell and the consummation of the sale to Standford, to be a significant index of petitioners non-participation in the really critical events leading to the consummation of said sale., i.e., the negotiations to convince Standford to sell at Araneta, Inc.s asking price, the finalization of the terms and conditions of the sale, the drafting of the deed of sale, the processing of pertinent documents, and the delivery of the shares of stock to Standford . . . Petitioners were not the efficient procuring cause in bringing about the sale . . . and are, therefore, not entitled to the stipulated brokers commission. . . (at pp. 77-78.)

15

In contrast, in Manotok Bros. Inc. v. Court of Appeals, 221 SCRA 224 (1993), the Court held that although the sale of the object of the agency to sell was perfected three days after the expiration of the agency period, the agent was still be entitled to receive the commission stipulated based on the doctrine held in Prats v. Court of Appeals, 81 SCRA 360 (1978), that when the agent was the efficient procuring cause in bringing about the sale then the agent was entitled to compensation. In essence, the Court ruled that when there is a close, proximate and causal connection between the agents efforts and labor and the principals sale of his property, the agent is entitled to a commission. It ought to be noted though that even under the Prats doctrine, the ultimate objective of actual sale being effected, must be present for the agent or broker to earned his commission.

The matter pertaining to entitlement to commission will be discussed in greater details in the section below that distinguishes a contract of agency from that of a brokers contract.

4. Essential Characteristics of Agency

Aside from being a nominate, principal and consensual contract, Rallos v. Felix Go Chan & Sons Realty Corp., 81 SCRA 251 (1978), characterized a contract of agency as being personal, representative, and derivative in nature. (at p. 259.)

a. Nominate and Principal

Not only is the contract of agency specifically named as such under the Civil Code, it is a principal contract because it can stand on its own without need of another contract to validate it.

The real value of the contract of agency being a nominate and principal contract is that it has been so set apart by law and

16

provided with its own set of rules and legal consequences, that any other arrangement that essentially falls within its terms shall be considered as an agency arrangement and shall be governed by the Law on Agency, notwithstanding any intention of the parties to the contrary. After all, a contract is what the law says it is, and not what the parties call it.

In Doles v. Angeles, 492 SCRA 607 (2006), it was held that if an act done by one person in behalf of another is in its essential nature one of agency, the former is the agent of the latter notwithstanding he or she is not so called it will be an agency whether the parties understood the exact nature of the relation or not.

b. Consensual

Art. 1869. Agency may be express, or implied from

the acts of the principal, from his silence or lack of action, or

his failure to repudiate the agency, knowing that another

person is acting on his behalf without authority.

Agency may be oral, unless the law requires a specific

form. (1710a)

Art. 1870. Acceptance by the agent may also be

express, or implied from his acts which carry out the agency,

or from his silence or inaction, according to the

circumstances. (n).

o

The contract of agency is perfected by mere consent, and is therefore aconsensual contract. Under Article 1869 of the Civil Code, an agency may be express or implied from the act of the principal, from his silence or lack of action, or failure to repudiate the agency; agency may be oral, unless the law requires a specific form. See also Litonjua, Jr. v. Eternit Corp., 490 SCRA 204 (2006).

17

Under Article 1870 of the Civil Code, acceptance by the agent may also be express, or implied from his acts which carry out the agency, of from his silence or inaction according to the circumstances.

In other words, the contract of agency is essentially a consensual contract, and that as a general rule no form or solemnity is required in order to make it valid, binding and enforceable.

c. Unilateral and Primarily Onerous

Ordinarily, an agency is onerous in nature, where the agency expects compensation for his services in the form of commissions. However, Article 1875 recognizes that an agency may be supported by pure liberality, and thus would be gratuitous, but the burden of proof would be to show that the agency was constituted gratuitously.

When it is gratuitous, the contract of agency is undoubtedly a unilateral contract because it only creates an obligation on the part of the agent. But even when it is supported by a valuable consideration (i.e., compensated or onerous agency), it would still be characterized as a unilateral contract, because it is only the fulfillment of the primary obligations of the agent to render some service upon which the subordinate obligation of the principal to pay the compensation agreed upon arises.

When an agent accepts the agency position without compensation, he assumes the same responsibility to carry out the agency and shall incur the same liability when he fails to fulfill his obligations to the principal. It is therefore rather strange that Article 1909 of the Civil Code provides that The agent is responsible not only for fraud, but also for negligence, which shall be judged with more or less rigor by the courts, according to whether the agency was or was not for a compensation.

18

d. Personal, Representative and Derivative

Art. 1897. The agent who acts as such is not

personally liable to the party with whom he contracts, unless

he expressly binds himself or exceeds the limits of his

authority without giving such party sufficient notice of his

powers. (1725)

o

There is no doubt that agency is a species of the broad grouping of what we call the service contracts, which includes employment contract, management contract, contract-for-a piece of work, and a brokerage arrangement. There are also special service contracts which include the rendering of professional service (e.g., doctors and lawyers), and consultancy work. But it is the characteristic of representation that is the most distinguishing mark of agency when compared with other service contracts, in that the main purpose is to allow the agent to enter into contracts with third parties on behalf of, and which would be binding on, the principal.

Rallos holds that the personal, representative and derivative nature of the contract of agency springs from the basic fact that The authority of the agent to act emanates from the powers granted to him by his principal; his act is the act of the principal if done within the scope of the authority. Qui facit per alim facit per se. He who acts through another acts himself. (at p. 259.)

In Amon Trading Corp. v. Court of Appeals, 477 SCRA 552 (2005), the Court decreed that In a bevy of cases as the avuncular case of Victorias Milling Co., Inc. v. Court Appeals, [333 SCRA 663 (2000)], the Court decreed from Article 1868 that the basis of agency is representation, (at p. 560), and that consequently one of the strongest feature of a true contract of agency is that of control that the agent is under the control and instruction of the principal. Thus, in Victorias Milling Co., Inc. v. Court of Appeals, 333 SCRA 663 (2000), it was ruled

19

It is clear from Article 1868 that the basis of agency is representation. On the part of the principal, there must be an actual intention to appoint or an intention naturally inferable from his words or actions; and on the part of the agent, there must be an intention to accept the appointment and act on it, and in the absence of such intent, there is generally no agency. One factor which most clearly distinguishes agency from other legal concepts is control; one person the agent agrees to act under the control or direction of another the principal. Indeed, the very word agency has come to connote control by the principal. The control factor, more than any other, has caused the courts to put contracts between principal and agent in a separate category. . . .

x x x

In the instant case, it appears plain to us that private respondent CSC was a buyer of the SLDFR form, and not an agent of STM. Private respondent CSC was not subject to STMs control. The question of whether a contract is one of sale or agency depends on the intention of the parties as gathered from the whole scope and effect of the language employed. That the authorization given to CSC contained the phrase for and in our (STMs) behalf did not establish an agency. Ultimately, what is decisive is the intention of the parties. That no agency was meant to be established by the CSC and STM is clearly shown by CSCs communication to petitioner that SLDR No. 1214M had been sold and endorsed to it. The use of the words sold and endorsed means that STM and CSC intended a contract of sale, and not an agency. . . (at pp. 676-677; emphasis supplied.)

Doles v. Angeles, 492 SCRA 607 (2006), held that for an agency to arise, it is not necessary that the principal personally encounter the third person with whom the agent interacts precisely, the purpose of agency is to extend the personality of the principal through the facility of the agent.

In Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007), the Court held

20

It is said that the basis of agency is representation, that is, the agent acts for and on behalf of the principal on matters within the scope of his authority and said acts have the same legal effect as if they were personally executed by the principal. By this legal fiction, the actual or real absence of the principal is converted into his legal or juridical presence qui facit per alium facit per se. (at p. 593.)

Recently, in Manila Memorial Park Cemetery, Inc. v. Linsangan, 443 SCRA 377 (2004), the Court reiterated the principle that whatever the parties name the contractual relationship, when it has the essential elements of a contract of agency, then it would be governed by the Law on Agency, thus

In an attempt to prove that Baluyot was not its agent, MMPCI pointed out that under its Agency Manager Agreement, an agency manager such as Baluyot is considered an independent contractor and not an agent. However, in the same contract, Baluyot as agency manager was authorized to solicity and remit to MMPCI offers to purchase interment spaces belong to and sold by the latter. Notwithdtanding the claim of MMPCI that Baluyot was an independent contractor, the fact remains that she was authorized to solicit solely for and in behalf of MMPCI. As proper found both by the trial court and the Court of Appeals, Baluyot was an agent of MMPCI, having represented the interest of the latter, and having been allowed by MMPCI to represent it in her dealings with its clients/prospective buyers. (at p. 390.)

(1) Principles Flowing from Agency Characteristics of

Personal, Representative and Derivative

The following principles flow from the application of the essential characteristics of an agency being personal, representative and derivative contract, thus:

(a) The contract entered into with third persons pertains to the principal and not to the agent; the agent is a stranger to said contract, although he physically was the one who entered into it in a representative capacity;

21

The liabilities incurred shall pertain to the principal and not the agent;

o

The agent has neither rights or obligations from the resulting contract;

The agent has no legal standing to sue upon said contract;

The agent who acts as such is not personality liable to the party with whom he contracts, unless he expressly binds himself or exceeds the limits of his authority without giving such party sufficient notice of his powers (Art. 1897, Civil Code; Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007);

When an agent purchases the property in bad faith, the principal is deemed to be a purchaser in bad faith. Caram, Jr. v. Laureta , 103 SCRA 7 (1981);

(b) Generally, all acts that the principal can do in person, he may do through an agent, except those which under public policy are strictly personal to the person of the principal.

(c) A suit against an agent in his personal capacity cannot, without compelling reasons, be considered a suit against the principal. Philippine National Bank v. Ritratto Groups, Inc., 362 SCRA 216 (2001).

(d) Notice to the agent should always be construed as notice binding on the principal, even when in fact the principal never became aware thereof. Air France v. Court of Appeals, 126 SCRA 448 (1983).

(e) Knowledge of the agent is equivalent to knowledge of the principal.

22

Except Where:

(1) Agents interests are adverse to those of the principal;

(2) Agents duty is not to disclose the information, as where he is informed by way of confidential information; and

(3) The person claiming the benefit of the rule colludes with the agent to defraud the principal (De Leon & De Leon, at p. 367, citing Teller, at p. 150.)

Thus, in Eurotech Industrial Technologies, Inc. v. Cuizon, 521 SCRA 584 (2007), the Court held

Article 1897 reinforces the familiar doctrine that an agent, who acts as such, is not personally liable to the party with whom he contracts. The same provision, however, presents two instances when an agent becomes personally liable to a third person. The first is when he expressly binds himself to the obligation and the second is when he exceeds his authority. In the last instance, the agent can be held liable if he does not give the third party sufficient notice of his powers. (at p. 593.)

In Philpotts v. Phil. Mfg. Co., 40 Phil 471 (1919), the Court held that the right of inspection given to a stockholder under the law can be exercised either by himself or by any proper representative or attorney in fact, and either with or without the attendance of the stockholder. This is in conformity with the general rule that what a man may do in person he may do through another.

e. Fiduciary and Revocable

A contract of agency creates a legal relationship of representation by the agent on behalf of the principal, where the powers of the agent are essentially derived from the principal, and consequently, it is essentiallyfiduciary in nature. One of the legal consequences

23

of the fiduciary nature of the contract of agency is that it is essentially revocable: neither the principal nor the agent can be legally made to remain in the relationship when they choose to have it terminated.

Severino v. Severino, 44 Phil. 343 (1923), held that the relations of an agent to his principal are fiduciary in character because they are based on trust and confidence, which must flow from the essential nature a contract of agency that makes the agent the representative of the principal. Consequently:

(a) As regards property forming the subject matter of the agency, the agent is estopped from asserting or acquiring a title adverse to that of the principal. (Art. 1435)

(b) In a conflict-of-interest situation, the agent cannot choose a course that favors himself to the detriment of the principal; he must choose to the best advantage of the principal. Thomas v. Pineda, 89 Phil. 312 (1951) Palma v. Cristobal, 77 Phil. 712 (1946); and

(c) The agent cannot purchase for herself the property of the principal which has been given to her management for sale or disposition (Art. 1491[2]);

Unless:

(i) There is and express consent on the part of the principal (Cui v. Cui, 100 Phil. 913 (1957); or

(ii) If the agent purchases after the agency is terminated (Valera v. Velasco, 51 Phil. 695 (1928).

In Republic v. Evangelista, 466 SCRA 544 (2005), the Court held that generally, the agency may be revoked by the principal at will, since it is a personal contract of representation based on trust and confidence reposed by the principal on his agent. As the power of the agent to act depends on the will and license of the principal he represents, the power of the agent ceases when the will or permission is withdrawn by the principal.

24

In Orient Air Services v. Court of Appeals, 197 SCRA 645 (1991), it was held that the decision of the lower court ordering the principal airline company to reinstate defendant as its general sales agent for passenger transportation in the Philippines in accordance with said GSA Agreement, was unlawful since courts have no authority to compel the principal to reinstate a contract of agency it has terminated with the agent:

Such would be violative of the principles and essence of agency, defined by law as a contract whereby a person binds himself to render some service or to do something in representation or on behalf of another, WITH THE CONSENT OR AUTHORITY OF THE LATTER. In an agent-principal relationship, the personality of the principal is extended through the facility of the agent. In so doing, the agent, by legal fiction, becomes the principal, authorized to perform all acts which the latter would have him do. Such a relationship can only be effected with the consent of the principal, which must not, in any way, be compelled by law or by any court. The Agreement itself between the parties states that either party may terminate the Agreement without cause by giving the other 30 days notice by letter, telegram or cable. (at p. 656.)

f. Preparatory and Progressive

A contract of agency does not exist for its own purpose; it is a preparatory contract entered into for other purposes that deal with the public in a particular manner: for the agent to enter into juridical acts with the public in the name of the principal . This characteristic of an agency is reflected in various provisions in the Law on Agency and in case-law, that seek to protect the validity and enforceability of contracts entered into pursuant to the agency arrangement, even when to do so would contravene strictly agency principles.

In another way of putting it, an agency contract is merely a tool ormedium resorted to achieve a greater objective of being able to enter into juridical relations on behalf of the principal;

25

considerations that pertain merely to the tool or medium certainly cannot outweigh considerations that pertain to the main objects of the agency. Since under the Rallos ruling the object [of every relationship of agency] is the execution of a juridical act in relation to a third person, (at p. 259), then considerations that seek to protect the interests of third parties dealing in good faith with an agent must, in case of conflict, prevail over principles pertaining to the intramural relationship between the principal and his agent.

5. Kinds of Agency

a. Based on the Business or Transactions Covered

Under Article 1876 of the Civil Code, an agency is termed to be a general agency when it encompasses all of the business of the principal. As demonstrated in the discussions hereunder, the better term for such an agency would be a universal agency, for the term general agency is one that is addressed to the general public, and not just a particular person or group of persons which whom the agent is to transact. (Besides, the term universal agency is more consistent with a similar coverage of universal partnership under the Law on Partnerships.)

On the other hand, Article 1876 of the Civil Code defines a special agency as one which covers only one or more specific transactions. The better term for such an agency is particular agency; for indeed, the term special agency has been used in decisions of the Supreme Court to refer to one which is addressed to a particular person or group of persons with whom the agent is to transact. (Again, the use of the term particular agency is more consistent with a similar coverage of particular partnership under the Law on Partnerships.)

In Siasat v. Intermediate Appellate Court, 139 SCRA 238 (1985), the Court held that a power of attorney which provides that This is to formalize our agreement for you to represent United Flag Industry to deal with any entity or organization, private or

26

government, in connection with the marketing of our productsflags and all its accessories. For your services, you will be entitled to a commission of 30%, was construed to authorize the agent to enter into contract of sale over the products covered and for which he would be entitled to receive commissions stipulated. Siasat distinguished three types of agency, namely universal, general, and special, in the following manner:

An agent may be (1) universal; (2) general, or (3) special. A universal agent is one authorized to do all acts for his principal which can lawfully be delegated to an agent. So far as such a condition is possible, such an agent may be said to have universal authority. . .

A general agent is one authorized to do all acts pertaining to a business of a certain kind or at a particular place, or all acts pertaining to a business of a particular class or series. He has usually authority either expressly conferred in general terms or in effect made general by the usages, customs or nature of the business which he is authorized to transact.

An agent, therefore, who is empowered to transact all the business of his principal of a particular kind or in a particular place, would for this reason, be ordinarily deemed a general agent. . .

A special agent is one authorized to do some particular act or to act upon some particular occasion. He acts usually in accordance with specific instructions or under limitations necessarily implied from the nature of the act to be done. . . (at p. 245, quoting from Padilla, Civil Law, the Civil Code Annotated, Vol. VI, 1969 Edition, p. 204.)

According to Siasat the express authority given to the agent should be that it was a general agency and the transactions entered into in behalf of the principal which pursued the sale of the principals products, were valid and binding and justified the agents right to receive the commission promised her, thus

One does not have to undertake a close scrutiny of the document embodying the agreement between the petitioners and the

27

respondent to deduce the latter was instituted as a general agent. Indeed, it can easily be seen by the way general words were employed in the agreement that no restrictions were intended as to the manner the agency was to be carried out or in the place where it was to be executed. The power granted to the respondent was so broad that it practically covers the negotiations leading to, and the execution of, a contract of sale of petitioners merchandise with any entity or organization. (at p. 245.)

A good illustration of the principle pertaining to a special or particular agency would be the decision in Insular Drug v. PNB, 58 Phil. 684 (1933), where the Court held that the only power given to an agent is to indorse commercial paper (checks), then such power is a very responsible power and will not be lightly inferred, and consequently a salesman with authority to collect money belonging to his principal does not have the implied authority to indorse checks received in payment; and that any person taking checks made payable to a corporation which can act only by agents does so at his peril, and must abide by the consequence if the agent who indorses the same is without authority.

The classifications under Article 1876 are more academic than practical, since outside of guardianship proceedings, hardly anybody in the modern world empowers an agent to cover every business aspect owned by the principal. Beside, as shown by the discussions hereunder on general power of attorney, and special power of attorney, such a classification is not really useful because a general or universal agency can by law only cover general powers of attorney covering merely acts of administration; and cannot, without express or detailed description, cover special powers of attorney, covering particular acts of strict ownership. Therefore, a general agency is better achieved by other contractual forms such as a contract of employment, or a universal partnership.

b. Whether or Not It Covers Litigation Matters

28

Although not specifically treated in the Civil Code, we should distinguish between a type of agency called attorney-at-law, from that of attorney-in-fact.

We can begin the discussion with the ruling in J-Phil Marine, Inc. v. NLRC, 561 SCRA 675 (2008), where the Court held that the relation of attorney and client is in many respects one of agency, and that the general rules of agency apply to such relation. This is not necessarily a straight forward proposition, for indeed both a regular agency-principal and attorney-client relationship are both fiduciary in character, and yet fiduciary character under the agency-principal relationship is based on the doctrine of representation for purpose of entering into juridical acts that bind the principal, while that in an attorney-client relationship is based on the need to rely upon the competence and integrity of the lawyer in the disposition of certain matters relating to law that have a direct effect on the property, liberty or life of the client.

An attorney-at-law, necessarily means the appointment of an agent to represent the principal on legal matters, particularly on matters pertaining to litigation or court matters. But not every attorney-client relationship is a contract of agency where the essential objective is representation, such as when an attorney is retained to draw-up legal documents. But when it comes to litigation, the retaining of an attorney is truly in representation of the client-principal before the court, such that the acts of the attorney for and in behalf of the client, that notice to the attorney, and service of judicial process to the attorney, is equivalent to service to the client principal. Under existing rules and jurisprudence, such an agent would be practicing law and would have to be a licensed lawyer. The relationship is one that is fiduciary and professional in character, and is governed by separate rules, including the legal professional code and the rules promulgated by the Supreme Court covering the practice of law.

Consequently, the term attorney-in-fact is intended to describe all agents appointed by a principal to act on juridical relations that have nothing to do with legal matters and do not constitute a

29

practice of law on the part of the agent. This is the classification that covers the contract of agency governed by the Civil Code.

It should be noted, however, that even in the case of an attorney-at-law representing a client in a court case, there are certain powers which are not inherent in the position of an attorney-at-law to legally bind the client, such as the power to compromise, to arbitrate, etc. Whether an attorney-at-law has power to bind the client principal in such matters are governed by the rules of the Civil Code on special agency or special powers of attorney.

c. Whether It Covers Acts of Administration or Acts of

Ownership

It is in the realm of attorney-in-fact that we would more appropriately use the classifications of general power of attorney and special power of attorney to describe the authority and power of the agent.

Simply stated, a general power of attorney covers only acts of administration, or expressed in commercial terms, it only covers power to pursue the ordinary or regular course of business. On the other hand, aspecial power of attorney covers acts of dominion or strict ownership, or represents a situation that is described as extraordinary conditions or those pursued not in the ordinary course of business. Thus, whether a power of attorney is general or special, really depends on the nature of the business to which it is directed at. To illustrate, although on their own the power to sell, is considered acts of strict ownership, nevertheless, when they pertain to the ordinary pursuit of the business to which the agent has been designated to manage, say a merchandising store, the sale of the goods in the ordinary course of business would be part of the general power of attorney given to him to administer and manage the store, and such sales contracts are mere in the ordinary pursuit of the business.

Thus, under Article 1877 of the Civil Code provides that An agency couched in general terms comprises only acts of administration, even if the principal should state that he withholds no power or that

30

the agent may execute such acts as he may consider appropriate, or even though the agency should authorize a general and unlimited management.

The general rule is that unless so expressly stated, when an agency is constituted (i.e., when a person is designated as an agent), it only covers the powers to execute acts of administration in relation to the business, venture or transaction referred to in the commission. In other words, whenever it is clear that an agent has been duly designated or appointed by the principal, in the absence of limiting conditions or provision, then such agent is deemed to have full powers to pursue any act in the name of the principal which are in the ordinary course of business.

In Macke vs. Camps, 7 Phill. 553 (1907), the Court held

It seems easy to answer that acts of administration are those which do not imply the authority to alienate for the exercise of which an express power is necessary. Yet what are acts of administration will always be a question of fact, rather than of law, because there can be no doubt that sound management will sometimes require the performance of an act of ownership. (12 Manresa 468) But, unless the contrary appears, the authority of an agent is presumed to include all the necessary and usual means to carry out the agency into effect. (at p. 555.)

Distinction between general power of attorney and special power of attorney shall be covered in the succeeding chapter on the Power and Authority, Duties and Obligations, of the Agent.

Parenthetically, it has been held in Teodoro v. Metropolitan Bank and Trust Co., 575 SCRA 82 (2008), that a special power of attorney executed in a foreign country is generally not admissible in evidence as a public documents in our local courts.

6. Agency Distinguished from Similar Contracts

a. From an Employment Contract

31

Unlike an agency relationship which is essentially contractual in nature, an employment contract under Article 1700 of the Civil Code is The relationship between capital and labor [which] are not merely contractual. They are so impressed with public interest that labor contracts must yield to the common good. Therefore, such contracts are subject to the special laws on labor unions, collective bargaining, strikes and lockouts, closed shop, wages, working conditions, hours of labor and similar subjects. More specifically, the purpose of an employer-employee relationship is for the employee to render service for the direct benefit of the employer or of the business of the employer; while agency relationship is entered into to enter into juridical relationship on behalf of the principal with third parties. There is, therefore, no element of representation in a contract of employment, the employee does not have the power to enter into juridical relations on behalf of the employer .

In Dela Cruz v. Northern Theatrical Enterprises, 95 Phil 739 (1954), the Court held that the relationship between the corporation which owns and operates a theatre, and the individual it hires as a security guard to maintain the peace and order at the entrance of the theatre was not that of principal and agent, because the principle of representation was in no way involved. The security guard was not employed to represent the defendant corporation in its dealings with third parties; he was a mere employee hired to perform a certain specific duty or task, that of acting as special guard and staying at the main entrance of the movie house to stop gate crashers and to maintain peace and order within the premises.

b. From the Contract for a Piece-of-Work

Under Article 1713 of the Civil Code, By the contract for a piece of work the contractor binds himself to execute a piece of work for the employer, in consideration of a certain price or compensation. The contractor may either employ only his labor or skill, or also furnish the material. Under a contract-for-a-piece-of-work, the contractor is not an agent of the principal (i.e., the client), and the contractor

32

has no authority to represent the principal in entering into juridical acts with third parties. The essence of every contract-for-a-piece-of-work is that the services rendered must give rise to the manufacture or production of the object agreed upon. Although the designation of the subject matter to be manufactured or produced is agreed upon by the parties in a contract-for-a-piece-of-work, there is no element of control since the contractor cannot be dictated upon by the client on how to go about accomplishing the objective of the contract.

In Fressel v. Mariano Uy Chaco Sons & Co., 34 Phil. 122 (1915), it was held that where the contract entered into is one where the individual undertook and agreed to build for the other party a costly edifice, the underlying contract is one for a contract-for-a piece-of-work, and not a principal and agency relation. Consequently, the contract is authorized to do the work according to his own method and without being subject to the clients control, except as to the result of the work; he could purchase his materials and supplies from whom he pleased and at such prices as he desired to pay. And the mere fact that it was stipulated in the contract that the client could take possession of the work site upon the happening of specified contingencies did not make the relation into that of an agency. Consequently, when the client did take over the unfinished works, he did not assume any direct liability to the suppliers of the contractor.

c. From the Management Agreement

In Nielson & Co., Inc. v. Lepanto Consolidated Mining Co., 26 SCRA 540 (1968), the Court held that in both agency and lease of services (i.e., management contract), one of the parties binds himself to render some service to the other party. Agency, however, is distinguished from lease of work or services in that the basis of agency is representation, while in the lease of work or services the basis is employment. The lessor of services does not represent his employer, while the agent represents his principal. x x x . There is another obvious distinction between agency and lease of services.

33

Agency is a preparatory contract, as agency does not stop with the agency because the purpose is to enter into other contracts. The most characteristic feature of an agency relationship is the agents power to bring about business relations between his principal and third persons. The agent is destined to execute juridical acts (creation, modification or extinction of relations with third parties). Lease of services contemplate only material (non-juridical) acts. (at pp. 546-547; quoting from Reyes and Puno, An Outline of Philippine Civil Law, Vol. V, p. 277.)

Nielson & Co. also held that where the principal and paramount undertaking of the manager under a Management Contract was the operation and development of the mine and the operation of the mill, and all other undertakings mentioned in the contract are necessary or incidental to the principal undertakingthese other undertakings being dependent upon the work on the development of the mine and the operation of the mill. In the performance of this principal undertaking the manager was not in any way executing juridical acts for the principal, destined to create, modify or extinguish business relations between the principal and third person. In other words, in performing its principal undertaking the manager was not acting as an agent of the principal, in the sense that the term agent is interpreted under the law of agency, but as one who was performing material acts for an employer, for compensation. Consequently, the management contract not being an agency cannot be revoked at will and was binding to its full contracted period.

In Shell Co. v. Firemens Insurance of Newark, 100 Phil. 757 (1957), in ruling that the operator was an agent of the Shell company, the Court took into consideration the following facts: (a) that the operator owed his position to the company and the latter could remove him or terminate his services at will; (b) that the service station belonged to the company and bore its tradename and the operator sold only the products of the company; that the equipment used by the operator belonged to the company and were just loaned to the operator and the company took charge of their repair and maintenance; (c) that an employee of the company

34

supervised the operator and conducted periodic inspection of the companys gasoline and service station; and (d) that the price of the products sold by the operator was fixed by the company and not by the operator.

d. From the Contract of Sale

Art. 1466. In construing a contract containing

provisions characteristic of both the contract of sale and of

the contract of agency to sell, the essential clauses of the

whole instrument shall be considered. (n)

o

Under Article 1466 of the Civil Code, In construing a contract containing provisions characteristic of both the contract of sale and of the contract of agency to sell, the essential clauses of the whole instrument shall be considered. Jurisprudence has indicated what the essential clauses that should indicate whether it is one of sale or agency to sell/purchase, refers to stipulations in the contract which places obligations on the part of the purported agent having to do with what should be a seller obligation to transfer ownership and deliver possession of the subject matter, or the buyers obligation on the payment of the price.

In Quiroga v. Parsons, 38 Phil. 501 (1918), although the parties designated the arrangement as an agency agreement, the Court found the arrangement to be one of sale since the essential clause provided that Payment was to be made at the end of sixty days, or before, at the [principals] request, or in cash, if the [agent] so preferred, and in these last two cases an additional discount was to be allowed for prompt payment. These conditions to the Court were precisely the essential features of a contract of purchase and sale because there was the obligation on the part of the purported principal to supply the beds, and, on the part of the purported agent, to pay their price, thus:

35

These features exclude the legal conception of an agency or order to sell whereby the mandatory or agent received the thing to sell it, and does not pay its price, but delivers to the principal the price he obtains from the sale of the thing to a third person, and if he does not succeed in selling it, he returns it. By virtue of the contract between the plaintiff and the defendant, the latter, on receiving the beds, was necessarily obliged to pay their price within the term fixed, without any other consideration and regardless as to whether he had or had not sold the beds. (at p. 505.)

As a consequence, the revocation sought to be made by the principal on the purported agency arrangement was denied by the Court, the relationship being one of sale, and the power to rescind is available only when the purported principal is able to show substantial breach on the part of the purported agent.

Quiroga further ruled that when the terms of the agreement compels the purported agent to pay for the products received from the purported principal within the stipulated period, even when there has been no sale thereof to the public, the underlying relationship is not one of contract of agency to sell, but one of actual sale. A true agent does not assume personal responsibility for the payment of the price of the object of the agency; his obligation is merely to turn-over to the principal the proceeds of the sale once he receives them from the buyer. Consequently, since the underlying agreement is not an agency agreement, it cannot be revoked except for cause.

In Gonzalo Puyat & Sons, Inc. v. Arco Amusement Company, 72 Phil. 402 (1941), which covered a purported agency contract to purchase, the Court looked into the provisions of their contract, and found that the letters between the parties clearly stipulated for fixed prices on the equipment ordered, which admitted no other interpretation than that the [principal] agreed to purchase from the [agent] the equipment in question at the prices indicated which are fixed and determinate. (at p. 407). The Court held that whatever unforeseen events might have taken place unfavorable to the [agent], such as change in prices, mistake in their quotation, loss of the goods not covered by insurance or failure of the Starr Piano

36

Company to properly fill the orders as per specifications, the [principal] might still legally hold the [agent] to the prices fixed. (at p. 407.) It was ruled that the true relationship between the parties was in effect a contract of sale. Consequently, the demand by the purported principal of all discounts and benefits obtained by the purported agent from the American suppliers under the theory that all benefits received by the agent under the transactions were to be accounted for the benefit of the principal, was denied by the Court.

Gonzalo Puyat also ruled that when under the terms of the agreement, the purported agent becomes responsible for any changes in the acquisition cost of the object he has been authorized to purchase from a supplier in the United States, the underlying agreement is not an contract of agency to buy, since an agent does not bear any risk relating to the subject matter or the price. Being truly a contract of sale, any profits realized by the purported agent from discounts received from the American supplier, pertain to it with no obligation to account for it, much less to turn it over, to the purported principal. Reiterated in Far Eastern Export & Import Co., v. Lim Tech Suan, 97 Phil. 171 (1955).

In Chua Ngo v. Universal Trading Co., Inc., 87 Phil. 331 (1950), where a local importing company was contracted to purchase from the United States several boxes of oranges, most of which were lost in transit, the purchaser sought to recover the advance purchased price paid, which were refused by the local importing company on the ground that it merely imported the oranges as agent of the purchaser for which it could not be held liable for their loss in transit. The Court, in reviewing the terms and conditions of the agreement between the parties, held that the arrangement was a sale rather than a contract of agency to purchase on the following grounds: (a) no commission was paid by the purchaser to the local importing company; (b) the local importing company was given the option to resell the oranges if the balance of the purchase price was not paid within 48 hours from notification, which clearly implies that the local importing company did in fact sell the oranges to the purchaser; (c) the local importing company placed order for the

37

oranges a lower the price agreed upon with the purchaser which it could not properly do if indeed it were merely acting as an agent; (d) the local importing company charged the purchaser with a sales tax, showing that the arrangement was indeed a sale; and (e) when the losses occurred, the local importing company made claims against the insurance company in its own name, indicating that he imported the oranges as his own products, and not merely as agent of the local purchaser.

In Pearl Island Commercial Corp. v. Lim Tan Tong, 101 Phil. 789 (1957), the Supreme Court was unsure of its footing when it tried to characterize a contract of sale (Contract of Purchase and Sale) between the manufacturer of wax and its appointed distributor in the Visayan area, as still being within a contract of agency in that while providing for sale of Bee Wax from the plaintiff to Tong and purchase of the same by Tong from the plaintiff, also designates Tong as the sole distributor of the article within a certain territory. (at p. 792) Such reasoning in Pearl Island is not sound, since as early as in Quiroga v. Parson, the Court had already ruled that appointing one as agent or distributor, when in fact such appointee assumes the responsibilities of a buyer of the goods, does not make the relationship one of agency, but that of sale. Perhaps the best way to understand the ruling in Pearl Island was that the suit was not between the buyer and seller, but by the seller against the surety of the buyer who had secured the shipment of the wax to the buyer, and the true characterization of the contract between the buyer and seller was not the essential criteria by which to fix the liability of the surety, thus

True, the contract (Exhibit A) is not entirely clear. It is in some respects, even confusing. While it speaks of sale of Bee Wax to Tong and his responsibility for the payment of the value of every shipment so purchased, at the same time it appoints him sole distributor within a certain area, the plaintiff undertaking is not to appoint any other agent or distributor within the same area. Anyway, it seems to have been the sole concern and interest of the plaintiff to be sure that it was paid the value of all shipments of Bee Wax to Tong and the Surety Company by its bond, guaranteed in

38

the final analysis said payment by Tong, either as purchaser or as agent. . . . (at p. 793.)

In Ker & Co., Ltd. v. Lingad, 38 SCRA 524 (1971), covering a contract of distributorship, it was specifically stipulated in the contract that all goods on consignment shall remain the property of the Company until sold by the Distributor to the purchaser or purchasers, but all sales made by the Distributor shall be in his name; and that the Company at its own expense, was to keep the consigned stock fully insured against loss or damage by fire or as a result of fire, the policy of such insurance to be payable to it in the event of loss. It was further stipulated that the contract does not constitute the Distributor the agent or legal representative of the Company for any purpose whatsoever. Distributor is not granted any right or authority to assume or to create any obligation or responsibility, express or implied in behalf of or in the name of the Company, or to bind the Company in any manner or thing whatsoever. In spite of such stipulations, the Court did find the relationship to be one of agency, because it did not transfer ownership of the merchandise to the purported distributor, even though it was supposed to enter into sales agreements in the Philippines in its own name, thus:

The transfer of title or agreement to transfer it for a price paid or promised is the essence of sale. If such transfer puts the transferee in the attitude or position of an owner and makes him liable to the transferor as a debtor for the agreed price, and not merely as an agent who must account for the proceeds of a resale, the transaction is a sale; while the essence of an agency to sell is the delivery to an agent, not as his property, but as the property of the principal, who remains the owner and has the right to control the sale, fix the price, and terms, demand and receive the proceeds less the agents commission upon sales made. (at p. 530.)

In Lim v. Court of Appeals, 254 SCRA 170 (1996), it was held that as a general rule, an agency to sell on commission basis does not belong to any of the contracts covered by Articles 1357 and 1358 of the Civil Code requiring them to be in a particular form, and not one enumerated under the Statutes of Frauds in Article 1403. Hence,

39

unlike a sale contract which must comply with the Statute of Frauds for enforceability, a contract of agency to sell is valid and enforceable in whatever form it may be entered into.

In Victoria Milling Co., Inc. v. Court of Appeals, 333 SCRA 663 (2000), the Court held that an authorization given to the buyer of goods to obtain them from the bailee for and in behalf of the bailor-seller does not necessarily establish an agency, since the intention of the parties was for the buyer to take possession and ownership over the goods with the decisive language in the authorization being sold and endorsed.

The old decision in National Rice and Corn Corp. v. Court of Appeals, 91 SCRA 437 (1979), presents an interesting situation where it is possible for a party to enter into an arrangement, where a portion thereof is as agent, and the other portion would be as buyer, and still be able to distinguish and set apart to the two transactions to determine the rights and liabilities of the parties.

In National Rice a formal contract was entered into between the National Rice & Corn Corp. (NARIC) and the Davao Merchandising Corp. (DAMERCO), where they agreed that DAMERCO would act as an agent of NARIC in exporting the quantity and kind of corn and rice mentioned in the contract (Exhibit A), as well as in importing the collateral goods that will be imported thru barter on a back to back letter of credit or no-dollar remittance basis; and with DAMERCO agreeing to buy the aforementioned collateral goods. Although the corn grains were duly exported, the Government had issued rules banning the barter of goods from abroad. NARIC then brought suit against DAMERCO seeking recovery of the price of the exported grains. The Court ruled that insofar as the exporting of the grains was concerned, DAMERCO acted merely as agent of NARIC for which it cannot be held personally liable for the shortfall considering that it had acted within the scope of its authority. The Court had agreed that indeed the other half of the agreement whereby DAMERCO bound itself as the purchaser of the collateral goods to be imported from the proceeds of the sale of the corn and rice, was a valid and binding contract of sale, but for which DAMERCO could not be made to pay the purchase price, because

40

NARIC itself was no longer in a position to import any of such goods into the country, by reason of force majeure, thus

It is clear that if after DAMERCO had spent big sums incident to carrying out the purpose of the contract, the importation of the remaining collateral goods worth about US$480,000.00 could not be effected due to suspension by the government under a new administration of barter transactions, the NARIC (now Rice and Corn Administration) ought to make the necessary representations with the government to enable DAMERCO to import the said remaining collateral goods. The contract, Exhibit A, has reciprocal stipulations which must be given force and effect. (at p. 449.)

Although it is clear from the decision that DAMERCO had assumed also the position of being a buyer of goods from NARIC, the Court in National Ricewas able to segregate his role as merely an agent of NARIC insofar as the export of the grains was concerned, and apply the doctrine that an agent does not assume any personal obligation with respect to the subject matter of the agency nor of the proceeds thereof, his obligation being merely to turn-over the proceeds to the principal whenever he receives them. National Rice also demonstrate the progressive nature of every contract of agency, in that it presents a pliable legal relationship which may be adopted into other relationships, such a contract of sale, to be able to achieve commercial ends.

e. From a Contract of Brokerage

In the early decision in Behn, Meyer and Co., Ltd. v. Nolting and Garcia, 35 Phil. 274 (1916), the Supreme Court defined broker to mean as follows

. . . A broker is generally defined as one who is engaged, for others, on a commission, negotiating contracts relative to property with the custody of which he has no concern; the negotiator between other parties, never acting in his own name, but in the name of those who employed him; he is strictly a middleman and for some purpose the

41

agent of both parties. (19 Cyc., 186; Henderson vs. The State, 50 Ind., 234; Blacks Law Dictionary.) A broker is one whose occupation it is to bring parties together to bargain, or to bargain for them, in matters of trade, commerce or navigation. (Mechem on Agency, sec. 13; Wharton on Agency, sec. 695). Judge Storey, in his work on Agency, defines a broker as an agent employed to make bargains and contracts between other persons, in matters of trade, commerce or navigation, for compensation commonly called brokerage. (Storey on Agency, sec. 28) (at p. 279-280.)

Behn, Meyer and Co., was a tax case where the Court needed to define the coverage of the term broker to determine the liability of a commercial enterprise for taxes and licenses as a broker. The commercial enterprise itself was engaged in the business . . . of buying and selling copra, hemp, and other native products of the Islands, and in such business the aforesaid plaintiff advanced money for the future delivery of copra and hemp, and took as security for the future delivery of such copra and hemp so contracted for a mortgage on the land upon which said copra or hemp was produced, and charging a discount on the future deliveries of said copra or hemp, which was in compensation for the money so advanced. (at p. 277.) Based on the definition of a broker (quoted above), the Court held that A real-estate broker negotiates the purchase or sale of real property. He may also procure loans on mortgaged security, collect rents, and attend to the letting and leasing of houses and lands. (Bouviers Law Dictionary.) A broker acts for another. In the present case the plaintiff was acting for itself. Whatever was done with reference to the taking of the mortgages in question was done as an incident of its own business. By the contract of brokerage a person binds himself to render some service or to do something in bhelaf of or at the request of another person (Art. 1209, Civil Code.) (at p. 280.)

Note therefore that the term broker is considered to be a commercial term for a person or entity engaged as a middleman to bring parties together in matters pertaining to trade, commerce or navigation. If the person has not been given the power to enter into the contract or commerce in behalf of the parties, then he is a

42

broker in the sense that his job mainly is to bring parties together to bargain, and in this sense, the broker does not assume the role of an agent because he has no power to enter into a contract in behalf of any of the parties. He also assumes no fiduciary obligations to either or both parties, since they are expected to use their own judgment in deciding to bind or not to bind themselves to a contract.

On the other hand, a broker may also be appointed with powers to enter into juridical acts on behalf of the principal, in which case, he is truly an agent. Thus, Behn, Meyer & Co. cites also the definition of an agent under Article 1209 of the Civil Code in order to define a broker.

In Pacific Commercial Co. v. Yatco, 68 Phil. 398 (1939), which was also a tax case, presented a more specific discussion of distinguishing between a specific type agency, which is that of a commission agent or then known as commission merchant from that of commercial broker, as one who does not execute juridical acts in behalf of the principal. In that decision, Pacific Commercial Company looked for purchasers of the sugar products of Victorias Milling, and once the corresponding purchase order is obtained from them, the same is sent to the office of Victorias Milling Co., in Manila, which, in turn, endorsed the order to its office in Negros, with instructions to ship the sugar thus ordered to Manila, Cebu or Iloilo, as the case may be. At times, the purchase is made for the delivery of the sugar ex-wareho0use of plaintiff [Pacific] and at other times for delivery ex-ship. In all cases, the bill of lading is sent to the plaintiff [Pacific]. If the sugar was to be delivered ex-ship, all that the plaintiff did was to hand over the bill of lading to the purchaser and collect the price. If it was for delivery ex-warehouse, the sugar is first deposited in the warehouse of the plaintiff before delivery tothe purchaser. (at p. 400.)

On the issue of whether Pacific Commercial Company acted as a commissioner merchant as to the guar devliered ex-warehouse the Court held:

43

The question of whether the appellant [Pacific], in connection with the sugar delivered ex-warehouse and thereafter sold to the purchasers, acted as a commission merchant, present no doubt. A commission merchant is one engaged in the purchase or sale for another of personal property which, for this purpose, is placed in his possession and at his disposal. He maintains a relation not only with his principal and the purchasers or vendors, but also with the property which is the subject matter of the transaction. In the present case, the sugar was shipped by Victorias Milling Co., and pupon arrival at the port of destination, the plaintiff received and transferred it for deposit in its warehouses until the purchaser called for it. The deposit of the sugar in the warehouses of the plaintiff was made upon its own account and at its own risk until it was sold and taken by the purchaser. There is, therefore, no doubt that the plaintiff, after taking the sugar on board until it was sold, had it in its possession and at its own risk, circumstances determinative of its statuts as a commissioner merchand in connection with the sale of sugar under these conditions. (at pp. 401-402.)

The notion of a commission merchant is still maintained in the New Civil Code in Articles 1902 to 1909 on the duties and responsibilities of a commission agent.

On the issue of whether Pacific Commercial Company acted as a commercial broker as to the sugar delivered ex-ship, the Court held:

There is also no dobut on the question of whether the plaintiff merely acted as a commercial broker as to the sale of the sugar delivered to the purchaser ex-ship. The broker, unlike the commission merchant, has no relation with the thing he sells or buy. He is merely an intermediary between the purchaser and the vendor. He acquires neither the possession nor the custody of the things sold. His only office is to bring together the parties to the transaction. These circumstances are prsent in connection with the plaintiffs sale of the sugar which was delivery to the purchaser ex-ship. The sugar sold under these conditions was shipped by the plaintiff at its expense and risk ex-ship by the purchaser. The plaintiff never had possession of the sugar at any time. The

44

circumstance that the bill of lading was sent to the plaintiff does not alter its character of being merely a broker, or constitute possession by it of the sugar shipped, inasmuch as the same was sent to it for the sole purpose of turning it over to the purchaser for the collection of the price. The sugar did not come to its possession in any sense. (at p. 402.)

Because of the recognition of the occupation of a commission merchant (i.e., commission agent), since Pacific Commercial Company, the Court had began to recognize that unless otherwise so indicated the termbroker is meant to cover a commercial broker acting not as an agent, but merely a middleman, who bears no relation with the thing he has been retained to buy or to sell; he is merely an intermediary between the purchaser and the vendor. He acquires neither the custody nor the possession of the thing he sells; his only office is to bring together the parties to the transaction.

In Reyes v. Mosqueda, 99 Phil. 241 (1956), the Court held that when a person has been engaged to negotiate with the owner of a parcel of land only the lowest purchase price that could be bargained for and in turn the owner set a final price and engaged the same person to find a buyer who would buy at such a price, such engagement was only as a broker, then in order to earn her commission, it was not sufficient for her to find a prospective buyer but to find onw who will actually buy the property on the terms and conditions imposed by the owner. (at p. 245.)

The all-encompassive defintion of broker (which may include that of a commission agent) in Bhen, Meyer & Co. was reiterated under the new Civil Code in Schmid and Oberly, Inc. v. RJL Martinez, 166 SCRA 493 (1988), as one who is engaged, for others, on a commission, negotiating contracts relative to property with the custody of which he has no concern; the negotiator between other parties, never acting in his own name but in the name of those who employed him. . . . a broker is one whose occupation is to bring the parties together, in matters of trade, commerce or navigation. (at p. 501.) It should be noted, however, that Schmid & Oberly, Inc.involved the issue of whether the breach of the implied

45

warranties of the seller in a contract of sale under an indent arrangement, which includes a recovery of the purchase price, could be pursued against the agent who effected the sale on behalf of the foreign principal-seller. It should therefore be clear that legally whether the intermediary was acting as a commission merchant/agent or a pure commercial broker, the general principal is neither of them would be liable personally for the breach of warranty of the principal-seller. A commission agent who acts in the name of the principal and within the scope of his authority is protected by the principle in Agency Law that he does not therefore become personally liable for the contracts he entered into in the name of the principal. A commercial broker, who merely intermediates between the seller and the buyer and for whom he has not executed any juridical act, is a complete stanger to the resulting contract of sale and certainly cannot be held liable thereon for lack of privity. After quoting from both Behn, Meyer & Co. and Pacific Commercial Co., the Court held that

Thus, the chief features of a commercial broker and a commercial merchant is that in effecting a sale, they are merely intermediaries or middle